What is Enterprise Value vs. Equity Value?

Picture yourself at the crowded stock exchange. Traders are screaming aggressively, and two words are repeated over and over—enterprise value vs. equity value.

What do they mean, and why do they matter in finance?

I will explain: The concept considers whether you are looking at the real worth of a company. Looking at the stock prices of companies, this number reflects the equity value. Enterprise value considers not just equity. It’s amazing and somewhat surprising, but enterprise value sums up equity, debt, cash, and non-operating assets. This brings a pure view of the company’s financial well-being.

Nine out of ten business owners underestimate the value of their enterprise by overlooking these stats. This is a staggering fact, indeed.

Understanding the enterprise value vs. equity value can make or break a deal in mergers and acquisitions. Studies show that 80% of failed mergers could have been salvaged if the parties had considered these values meticulously.

So, are you ready to unravel the significance of enterprise value vs. equity value and its real-world implications?

Table of Contents:

1. What is Enterprise Value?
2. What is Equity Value?
3. What is the Difference between Enterprise Value and Equity Value?
4. How to Calculate Equity Value and Enterprise Value?
5. How to Examine Enterprise Value vs. Equity Value?
6. Wrap Up

First…

What is Enterprise Value?

Definition: Enterprise Value (EV) is a measure of a company’s total value. It includes the market capitalization, debt, and preferred shares minus cash and cash equivalents. EV provides a comprehensive valuation metric.

• Market capitalization is calculated by multiplying the stock price by the number of outstanding shares.
• Debt includes both short-term and long-term obligations.
• Preferred shares are added because they represent a claim on assets.
• Cash and cash equivalents are subtracted, as they can be used to pay off debt.

EV is used in various financial analyses. It offers a more accurate valuation than market capitalization alone, as it accounts for a company’s debt and cash. Investors use EVs to assess acquisition targets, compare companies with different capital structures, and analyze Customer Acquisition.

In summary, enterprise value is a key metric that reflects a company’s true worth. It is essential for making informed investment and acquisition decisions.

What is Equity Value?

Definition: Equity Value is the worth of a company’s shareholders’ equity. It is calculated by multiplying the total number of outstanding shares by the current stock price. This measure represents the worth of a company’s ownership interests in the market.

Equity value, also called market capitalization, indicates the amount that investors are ready to invest in a company’s stock. In contrast to enterprise value, equity value excludes debt and cash. It concentrates only on the worth of the shares owned by the shareholders.

Investors consider this metric vital. It assists them in comprehending the market’s view of a company’s worth. Equity value plays a crucial role in different financial evaluations, such as assessing company market worth and analyzing stock prices.

Equity value is an important metric in determining a company’s market worth. It offers a glimpse into how the market perceives the company’s value, concentrating solely on the shareholders’ equity.

What is the Difference between Enterprise Value and Equity Value?

Understanding the difference between enterprise value (EV) and equity value is crucial for investors and financial analysts. Both metrics provide insights into a company’s valuation, but they measure different aspects. Here’s a detailed comparison: enterprise value vs. equity value.

Aspect	Enterprise Value (EV)	Equity Value
Definition	The total value of the company, including debt and excluding cash	Market value of shareholders’ equity
Formula	EV = (share price x No of shares) + total debt – cash	Equity value = No of shares x share price
Includes Debt	Yes	No
Preferred Shares	Included	Not included
Focus	Overall company valuation	The value attributed to shareholders
Use Cases	Mergers and acquisitions Comparing companies with different capital structures	Stock valuation Market perception analysis
Complexity	More complex to calculate due to additional factors	Simpler, as it relies solely on market capitalization
Perspective	Total enterprise value	Equity value only
Investment Insight	Provides a comprehensive view of a company’s worth	Shows the market’s view of the company’s equity value

How to Calculate Equity Value and Enterprise Value?

Understanding the enterprise value vs. equity value formula is crucial for evaluating a company’s financial health. These two metrics provide different perspectives on a company’s valuation. Here’s how to calculate both:

How to Calculate Enterprise Value:

Enterprise value provides a more comprehensive valuation by including debt and subtracting cash. The enterprise value formula is:

EV = (share price x # of shares) + total debt – cash

Example:

Given:

• Share Price: $40
• Number of Shares: 5 million
• Total Debt: $150 million
• Cash: $20 million

Calculation:

EV = (share price x # of shares) + total debt – cash

40×5,000,000=$200,000,000

EV=$200,000,000+$150,000,000−$20,000,000=$330,000,000

So, the Enterprise Value (EV) is $330 million.

How to Calculate Equity Value:

Equity value represents the market value of a company’s shareholders’ equity. The Equity value formula:

Equity value = Enterprise Value – total debt + cash

Or

Equity value = # of shares x share price

Example:

1. Calculating Equity Value from Enterprise Value (EV)

Given:

• Enterprise Value (EV): $330 million (from the previous example)
• Total Debt: $150 million
• Cash: $20 million

Calculation:

Equity value = Enterprise Value – total debt + cash

Equity Value=$330,000,000−$150,000,000+$20,000,000=$200,000,000

So, the Equity Value is $200 million.

2. Calculating Equity Value Directly:

Given:

• Number of Shares: 5 million
• Share Price: $40

Calculation:

Equity value = # of shares x share price

Equity Value=5,000,000×$40=$200,000,000Equity Value=5,000,000×$40=$200,000,000

So, the Equity Value is $200 million, which matches our previous calculations.

How to Examine Enterprise Value vs. Equity Value?

Data analysis, a puzzle wrapped in numbers, can leave even the savviest analysts scratching their heads. Add to that the complexity of Break-Even Analysis, and you have a challenge that demands more than mere calculations.

Enter the perplexing duo of enterprise value vs. equity value – a puzzle that requires not only numbers but also a clear visual approach to uncover their secrets. Visualizing their intricacies is the key to unlocking their full potential.

While Excel is a faithful sidekick, its data visualization prowess has its limits. But fear not: ChartExpo strides onto the scene as the knight in shining armor. ChartExpo wields advanced visualization powers to untangle even the most complex data knots.

Let’s learn how to install ChartExpo in Excel.

1. Open your Excel application.
2. Open the worksheet and click the “Insert” menu.
3. You’ll see the “My Apps” option.
4. In the Office Add-ins window, click “Store” and search for ChartExpo on my Apps Store.
5. Click the “Add” button to install ChartExpo in your Excel.

ChartExpo charts are available both in Google Sheets and Microsoft Excel. Please use the following CTAs to install the tool of your choice and create beautiful visualizations with a few clicks in your favorite tool.

Example

Let’s analyze enterprise value vs. equity value data below using ChartExpo.

Category	Amount
Enterprise value	1000
Cash	100
Dept	-150
Deficit	25
Equity value	975

• To get started with ChartExpo, install ChartExpo in Excel.
• Now Click on My Apps from the INSERT menu.

• Choose ChartExpo from My Apps, then click Insert.

• Once it loads, scroll through the charts list to locate and choose the “Waterfall Chart”. This chart is best suited to this scenario.

• You will see a Waterfall Chart on the screen.

• Click the “Create Chart From Selection” button after selecting the data from the sheet, as shown.

• ChartExpo will generate the visualization below for you.

• If you want to have the chart’s title, click Edit Chart, as shown in the above image.
• Click the pencil icon next to the Chart Header to change the title.
• It will open the properties dialog. Under the Text section, you can add a heading in Line 1 and enable Show.
• Give the appropriate title of your chart and click the Apply button.

• Click the “Save Changes” button to persist the changes.

• Your Waterfall Chart will appear as below.

Insights

• The enterprise is worth $1000 in total, which is its enterprise value.
• The total cash reserves equal $100.
• A debt of -$150 shows a liability.
• The $25 deficit is affecting the equity value.
• The equity value amounts to $975 once debt and deficit are factored in.

FAQs

How do you go from equity value to enterprise value?

To go from equity value to enterprise value, use this formula:

Enterprise Value = Equity Value + Total Debt−Cash and Cash Equivalents

Do you subtract equity investments from enterprise value?

No, you do not subtract equity investments from enterprise value. Enterprise value includes equity value and total debt and excludes cash and cash equivalents. Equity investments are not subtracted as they are part of the company’s overall valuation.

What is enterprise value vs. equity value goodwill?

Enterprise value includes goodwill as part of the total company valuation, accounting for intangible assets. Equity value, on the other hand, represents the market value of shareholders’ equity and does not separately account for goodwill.

Wrap Up

Investors and financial analysts must comprehend the difference between enterprise value (EV) vs. equity value. These two measures offer varying viewpoints on the value of a company. They give a glimpse into its financial status and how it is viewed in the market.

Enterprise value reflects a company’s total value, including its equity and debt. It provides a thorough perspective by considering the complete capital structure.

On the contrary, equity value only considers the market worth of a firm’s equity. It mirrors how the market values the company by considering its stock price and number of shares issued.

Enterprise value is calculated as total market capitalization plus total debt, preferred shares, and cash equivalents. It measures a company’s worth holistically, considering all operational resources available and financial obligations.

Equity value is given by the stock price multiplied by the number of shares available. This measure reveals the remaining value that shareholders can get once the predetermined debts have been settled. Equity value is a vital measure for potential investors who are more concerned with a company’s worth measurement.

While enterprise value and equity value offer information for determining a company’s worth, they have distinct scopes and calculation processes. Understanding these nuances is critical for robust financial analysis and informed investment decisions.